With the increasing legalization of gambling, digital sports entertainment and gaming company DraftKings Inc.’s (DKNG) shares have gained 16.7% over the past year to close yesterday’s trading session at $49. The company has several strategic collaborations with the likes of the National Football League and World Wrestling Entertainment, Inc. (WWE). It also acquired Blue Ribbon Software Ltd. in April 2021 and Vegas Sports Information Network, Inc. in March 2021. 

However, the stock has lost 31.9% over the past three months on concerns over investigations against DKNG for potential security violations.

Also, DKNG continues to face intense competition from several companies in the gambling space, such as Boyd Gaming Corporation (BYD), International Game Technology PLC (IGT), and Penn National Gaming, Inc. (PENN) whose near-term prospects look better. Furthermore, DKNG is not yet profitable. So, DKNG’s near-term prospects look bleak.

Note that BYD is one of the few stocks handpicked currently in the Reitmeister Total Return portfolio. Learn more here.

Here’s what we think could shape DKNG’s performance in the near term:

Questionable Practices

According to a report published by Hindenburg Research on June 15, DKNG’s merger with SBTech has exposed it to extensive dealings in black-market gaming, money laundering and organized crime. Consequently, the stock closed 4.2% lower on June 15.

DKNG commented that, “Our business combination with SBTech was completed in 2020. We conducted a thorough review of their business practices and we were comfortable with the findings.”

Redditors’ interest in the stock grew on speculation that the Hindenburg report was a strategic move made by Hindenburg to drive down the stock because it revealed that it has a short position against DKNG. Given such negative views on the company and the company’s weak financials, the stock may not be able to attract robust investor attention in the near term.

Top Line Growth Is Not Getting Reflected in the Bottom Line

For the first quarter, ended March 31, 2021, DKNG’s top line climbed 252.7% year-over-year to $312.28 million. However, its loss from operations for the quarter increased 391.2% year-over-year to $324.79 million. The company’s net loss increased 404.3% from the same period last year to $346.34 million. DKNG’s loss per share came in at $0.87, up 135.1% year-over-year. Moreover, it missed the Street’s EPS estimates in each of the trailing four quarters.

Stretched Valuation

In terms of forward EV/S, DKNG’s 15.22x is 881.9% higher than the 1.55x industry average. The 16.50x stock’s forward P/S is 1,159.5% higher than the 1.31x industry average. Its 10.05x forward Price-to-Book is also higher than the 3.59x industry average. 

POWR Ratings Reflect Bleak Prospects

DKNG has an overall F rating, which equates to Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. DKNG has a D grade for Value, which is in sync with its higher-than-industry valuation ratios. It has a D grade for Growth also, which is consistent with analysts’ expectations that its EPS will remain negative in  2021 and 2022.

The stock has an F grade for Quality. This is justified given DKNG’s negative value for its trailing-12-month net income margin versus the 4.44% industry average. Its trailing-12-month ROCE and ROTA are also negative compared to the industry averages of 11.87% and 3.74%, respectively.

In addition to the POWR Ratings grades we’ve just highlighted, we’ve also rated DKNG for Stability, Sentiment, and Momentum. Get all the DKNG ratings here.

DKNG is ranked #29 of 30 stocks in the Entertainment – Casinos/Gambling industry.

Better than DKNG: Click here to access 11 top-rated stocks in the same industry.

Bottom Line

DKNG is a prominent player in the sports-betting space. But with the major economies gradually recovering and physical casinos reopening, its online operations might take a hit. Furthermore, the company’s sky-high valuation.

DKNG shares were trading at $49.22 per share on Tuesday morning, up $0.22 (+0.45%). Year-to-date, DKNG has gained 5.71%, versus a 12.85% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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